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This Indicator Will Make You Trade Better (Trading Strategies With Momentum Indicator) - YouTube
Channel: The Secret Mindset
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Let鈥檚 consider that the market suddenly
makes a large movement in one direction.
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Perhaps this movement is in response to new
information coming into the market, or it
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can simply be a result of a random price spike.
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No matter the reason behind the price fluctuation,
this type of sharp movement is called a momentum
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move.
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This means that the market accelerated.
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As the price movement starts to slow down,
the momentum will also slow down.
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Now, wouldn鈥檛 be ideal if you entered when
the market momentum was increasing?
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Of course, when you have momentum on your
side, trading becomes easy.
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When you enter during a lack of momentum,
your trade will stagnate or even worse, you
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will get chopped out by lateral price movement.
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That鈥檚 why today we鈥檒l talk about momentum
indicator and you鈥檒l learn how to take signals
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in order to synchronize with the market when
is ready to make a significant move.
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Also, make sure you subscribe, click the bell
icon so you don鈥檛 miss our future uploads,
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and leave us a like to show your support.
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Momentum indicator is an oscillator which
identifies the strength or speed of a price
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movement.
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The momentum indicator compares the most recent
price to a previously determined price and
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measures the velocity of the price change.
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So basically is the difference between the
most recent price and the closing price of
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a previously determined period,
The faster the price increases, the bigger
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the increase in momentum indicator
The faster the price decreases, the bigger
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the decrease in momentum indicator
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The most used settings for the momentum indicator
are 7, 14, or 21.
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Momentum settings with values over 21 make
the indicator less sensitive.
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This will result in fewer, but better quality
signals and a smoother line of the indicator
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Momentum settings with values below 10 make
the indicator oversensitive.
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This will result in more market noise.
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Lower settings on the momentum indicator should
be carefully traded, as it can lead to many
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false signals.
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Here is how you should read the momentum indicator
when you analyze the trend:
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If the momentum indicator is above 0 level,
this signals that the market bias is on the
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upside
If the momentum indicator is above 0 level
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and the market price is increasing, this signals
that the trend is accelerating.
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This implies that the current upward trend
is strong and likely to continue.
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If the momentum indicator starts declining
but is still above the 0 level, this means
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that the trend is still on the upside, but
at a reduced rate.
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This signals that the market is losing upward
momentum.
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This doesn鈥檛 mean that a reversal or trend
change will happen, it鈥檚 just a warning
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sign that the momentum is getting weaker.
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If the momentum indicator is below 0 level,
this signals that the market bias is on the
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downside
If the momentum indicator is below 0 level
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and the market price is decreasing, this signals
that the downtrend is accelerating.
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This means that the current downtrend trend
is strong and likely to continue.
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If the momentum indicator starts increasing
but is still below the 0 level, this means
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that the trend is still on the downside, but
at a reduced rate and signals that the market
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is losing downward momentum.
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As in the case of an uptrend, this does not
mean that a reversal or trend change will
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happen.
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Ok, now let鈥檚 see how to trade with momentum
indicator.
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One of the most common ways in which traders
use the momentum indicator, but not the smart
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way, is to take signals when the oscillator
crosses the 0 level.
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When momentum indicator crosses above zero,
a buy signal is generated
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When momentum indicator crosses below zero,
a sell signal is generated
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If we analyze this tesla chart, we might get
fooled by the last 2 valid signals generated
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by the momentum indicator.
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As most indicators, during trending conditions,
the indicator will offer good signals.
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But what about when markets are not trending?
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Look at this.
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You can see at least 4 or 5 false signals
which would have damaged your account.
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Despite the fact we are analyzing the d1 chart,
we can clearly see that the indicator is not
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reliable for generating good signals when
used alone.
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So, you should never use momentum as a standalone
tool.
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Pay attention to key levels, identify the
major areas of support and resistance and
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use momentum as an additional confirmation
instrument, to confirm your bias.
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Now, let鈥檚 look at the same chart once again,
let鈥檚 plot the support and resistance lines,
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identify the trend using price action and
let鈥檚 see what the momentum is telling.
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So we are in a clear downtrend, with the price
making lower lows and lower highs.
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This tells me to ignore when the momentum
crosses the 0 line to the upside and focus
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only on short trades.
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Good, now let鈥檚 plot major support and resistance
lines.
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Here is the most important trade, our entry
point.
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We have a breakout of a key support line,
with the retest of the breakout level and
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the momentum staying below 0 line.
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A short around this area was a high probability
trade, because we had price action and momentum
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indicating the same thing.
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The momentum oscillator can also detect divergences.
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A divergence occurs when price action differs
from the evolution of momentum oscillator.
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This basically means that the momentum isn鈥檛
reflected in the price, which could be an
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early indicator of a reversal.
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As in the case of stochastic or rsi oscillators,
when a divergence occurs, a potential change
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in price direction could be on the cards.
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This is how i spot divergences with the momentum
indicator:
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I like to determine the main trend by adding
a 200-period exponential moving average.
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When the price trades above the 200-period
exponential moving average, i consider taking
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only long entries and when the price trades
below the 200-period exponential moving average
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i enter only short entries.
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I search for divergences between the momentum
and the price only in the direction of the
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main trend indicated by the 200-period exponential
moving average
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So, if the price trades above the 200 EMA,
I search for divergences on the lower side
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of the momentum indicator and if the price
trades below the 200 EMA, we search for divergences
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on the upper side of the momentum indicator.
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I enter when i spot a divergence in the direction
of the trend, when the momentum crosses below
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or above the 0 line.
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Also, if you aren鈥檛 familiar with divergences,
i recommend you to watch this video after
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you finish this one.
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Let鈥檚 use the same tesla stock, this time
on the hourly time frame.
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We added the 200 EMA, the price is below it,
lower lows and lower highs, so a clear downtrend.
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We search for divergences on the upper side
of momentum.
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Here is a first divergence, the price making
higher highs and momentum indicating lower
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highs.
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You enter short when the momentum crosses
below 0 line.
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Here鈥檚 a hidden divergence.
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The price is making lower highs but the momentum
shows higher highs.
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You enter when the momentum crosses the 0
line.
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You see how important this rule is.
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You cannot enter just because you see a divergence.
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The price could increase even more.
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By waiting for the 0-line cross, you have
a protection buffer, and enter only if the
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downward momentum is strong.
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Also, i know you will be tempted to take regular
divergences on the lower side of the momentum.
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I noticed this divergence here, and yes, it
was a good divergence trade and another one
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here, with a potential entry here, a perfect
trade, almost catching the market bottom.
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However, I trained myself to ignore the signals
that aren鈥檛 in line with the main trend.
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I lost a lot of money entering countertrend
positions.
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This technique will save you a lot of bad
entries, which at the end of the day, are
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contrary to the primary trend.
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I want to ride the main trend, and all the
setups that occur in the opposite direction
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will be ignored.
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In order to smooth the signals offered by
the momentum indicator, many traders prefer
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to add a moving average on it, like in the
case of the RSI, to take crossover signals.
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Now, when you want to trade a crossover between
the momentum oscillator and a moving average,
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you should be aware a crossover will be effective
when markets are trending.
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When markets are trading in a range, this
system will not work.
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This problem can be diminished by once again
responding only to signals in the trending
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direction.
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In this case, if the trend is up, make a long
trade only after the indicator has moved above
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the moving average.
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I still prefer the 0 line cross in combination
with price action, but you could test different
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moving average periods and momentum indicator
settings to find a combination that works
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for your trading style.
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